Working Paper: NBER ID: w18680
Authors: James J. Choi; Li Jin; Hongjun Yan
Abstract: Does information asymmetry affect the cross-section of expected stock returns? We explore this question using representative portfolio holdings data from the Shanghai Stock Exchange. We show that institutional investors have a strong information advantage, and that past aggressiveness of institutional trading in a stock positively predicts institutions' future information advantage in this stock. Sorting stocks on this predictor and controlling for other correlates of expected returns, we find that the top quintile's average annualized return in the next month is 10.8% higher than the bottom quintile's, indicating that information asymmetry increases expected returns.
Keywords: information asymmetry; expected returns; institutional trading
JEL Codes: G12; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| information asymmetry (D82) | expected stock returns (G17) |
| prior institutional ownership volatility (G32) | expected stock returns (G17) |
| prior institutional ownership volatility (G32) | institutional trading profits (G14) |
| institutional trading profits (G14) | expected stock returns (G17) |
| information asymmetry (D82) | institutional trading profits (G14) |